8 High Quality Undervalued Companies

Welcome back, everyone. Today on the Jezel Carlson Show. As all of us are looking for very high quality companies that are going through a dip, maybe the market is getting them wrong, maybe there's a bad narrative surrounding them. And in this case, I've identified 8 companies, 8 of them for our consideration, and we'll be going through each one. Some of these are buyback machines. Some of these are incredibly powerful earnings growers, and some of them are frankly being ignored.

But we're going to be going through each one of them. We'll also be looking at a portfolio update. We know that every month I have a document where I go through and I log the growth of the portfolio, the current allocation we go to, the performance against the various benchmarks and my thoughts on the market and and different sentiments for holdings. We'll be taking a look at this and giving you some insight into how I'm managing my investments. Now finally, we do have some news.

Today. The Wall Street Journal has reported that Paramount and Skydance are looking to buy out Warner Bros Discovery to make a massive behemoth of a streaming service, one that's so big, that has such a huge catalog, that has so much money that it will compete with Netflix. And this media conglomerate looking to happen very soon is owned by Larry Ellison's son, Larry Ellison, who has $400

billion. So this is a real competitive threat to Netflix. We'll be looking at what this means for Netflix going forward, the probability of this buyout happening and how it changes the dynamics with one of my largest positions. And then, of course, it's the weekend, which we look to financial TikTok to get some advice, some insight that only we can get from the likes of TikTok. In this case, it's a person, an individual here showing us the best way to get a job in

customer service. He has some unique methods of doing that. We'll look at it at the end of this episode. We have a lot to get to now. I'll start things off with a quick look at My Portfolio overall, the strategy, and that leads into the companies that I'm looking at buying. When we look at My Portfolio every month, I update this document here it says August, but I'm going to be updating it for September. I've already updated the composition and performances.

So this is just from a few days ago. This is what the portfolio looks like. This is the actual waiting when all of the holdings are combined. Now I have a more detailed breakdown of this on Qualtrim. We'll be looking at some of the gains and losses of these individual positions. So we have the allocation and we can also look at the performance of the portfolios against the benchmarks.

We have the passive income portfolio, the story fund against the S&P 500 and QQQ, the passive income portfolio. Overall, the compounded annual growth rate has been around 11.7%. Now this does change all the time, every day it's changing because the portfolio goes up and down. So this this will be different next week, but this is a running total around 1111 1/2%. Now if we look at the Story Fund, that's actually where most of the outperformances happen between my 2 portfolios.

The Story Fund is now becoming a very large portfolio. It's grown at around 21% per year and it's done so because it's highly concentrated, 5 to 6 holdings, and a lot of money is put into highly high conviction bets. A lot of money was put into Netflix at the Lowe's. A lot of money was put into Amazon at the Lowe's, Google at the Lowe's, Microsoft at the Lowe's.

When I saw these big companies that were extremely robust, resilient companies sell off in 2022, I put a lot of money in them and concentrated my capital, especially in Netflix. Netflix is around 6X since the bottom, which has made it a a huge winner. So a lot of that performance is driven from those buys. But even year to date this year, it's up 22%. The 20% tears just from a couple days ago up 22% and that's including Duolingo. So Duolingo going down that portfolio is still up 22%.

Now overall again 21% about double S the performance of both relative benchmarks. That's where I'm getting a lot of my out performance and I think it's going to continue on because the companies in this portfolio are fantastic. Now when we look at the combined portfolio, we have that here in Qualtrim combined value of one point $3,433,000 in gains. Now these gains that you're seeing here do not include sold holdings. So any that I've sold and I no longer hold, they're not included here.

Even if I've realized some gains in my current holdings, they're they're not included here as well as dividends aren't included here. If you include all of my previously sold positions, that's about another $100,000. So my total gain throughout the lifetime of the portfolio is

around $530,000, give or take. When we look at the individual positions, you can see S&P Global right at the top, but Google's catching it. I think Google very likely will become the top position of My Portfolio soon. That's because I keep buying it and the stock keeps going up, a dangerous combination. When you keep making a a company, you keep buying it, the stock goes up, it becomes a huge holding. So we're seeing that with Google, and I'll highlight more of that one to come.

We also have Amazon. This one could also become the very biggest position of My Portfolio. And when you look at the gains of these two companies, it's actually strikingly similar, 46800 in gains in Google, 46400 with Amazon. Now Google pays some dividends that aren't included here, so it's a little bit higher, but that's so close. These two companies, like I said, I just don't know which one to buy. I'm always wanting to buy both of them.

I think they're both fantastic. Then we have Netflix under that $80,000 in gains in this one. Then we have MasterCard, we have Microsoft. We have Costco, huge winner in the portfolio, booking holdings into it ASML. Then we have Salesforce, one of the losers in the portfolio right now, $7000 in the red. We have Moody's, big winner in the portfolio, Equifax. This one's a little early, but it's in the green. Texas Roadhouse is understated here. I sold $30,000 of the position.

I really made around $45,000 of gains in this one. And then Duolingo currently as a loser, down $2000. We have Apple as a big winner. Now, the reason I share this is because portfolio allocation is important. You should be thoughtful in the way that you're constructing your portfolio. For example, this all may look like a a lot of random tech companies. That's not really the case. S&P Global is an indicee company. It's a data company.

It's a market company. The risks that S&P Global has compared to Google are very different. The risks that Google have compared to Amazon are very different. The risks that Amazon have compared to Netflix are very different. Again, Microsoft MasterCard very different. The amount of overlapping risks with these companies are very few. I don't have a bunch of banks, Oregon, a bunch of credit card companies, or just a bunch of

SAS software companies. These are all operating in completely different industries, different markets, different customers, and you go down the list. And that's the case throughout my entire portfolio. There's very little overlapping risk, and that makes it so that when one thing happens to one company, it doesn't typically affect another company. The only thing that affects all these companies are macro risks, which you can't diversify away

from. But you can also invest in companies that have incredible balance sheets and they can be resilient through macro risks. So these companies are highly defensive against macro risk and they're also highly diversified against specific risk. That is an intentional construction. On top of that, these companies possess I think some of the widest moats in the market. Like the portfolio analysis suggests here, many of these companies operate under models anchored by highly reoccurring

revenue. They have subscription based income. Now I have a huge preference for companies that have that type of income, where you have the guaranteed monthly revenue, you have high operating leverage. I think those make for incredible investments. It only makes sense to do it in a company where subscription revenue actually makes sense, where they can continually improve for the customer. So these companies also have a huge preference for that. S&P Global has a massive

subscription business. Google has hundreds of millions of people on their subscriptions. Amazon has Amazon Prime with 300 million subscribers. Netflix has 300 + 1,000,000 subscribers on its service. MasterCard isn't quite but it's highly reoccurring revenue. Microsoft is overall a subscription company, the majority of the revenue subscription. Costco is a subscription company.

They have a membership and then Booking Holdings is building out a subscription into it says subscription and so on. And this strategy is working. The passive income portfolio is at an all time gain of $358,000. That's including dividends. So that's the total gain of that portfolio. We can look at the story fund and likewise this one has made incredible gains. It's at now $169,000. It's a combined gain of $528,000.

So over half $1,000,000. The goal is to double these portfolios over the next five years to turn this from $1,000,000 to 2 million, from 2:00 to 4:00 and so on. So there's a lot more compounding ahead now when we're looking at companies that I, I personally think are in a dip, they're they're on a, a deal right now. I'm going to go through the list here. We have a SMLASML is a company that has a dual pronged mode. First of all, the technology they create is very difficult to

replicate. But then they also have massive distribution. They have partnerships, long term partnerships with their customers. That's also another thing that's going to be very difficult to disrupt. So I look at this as a highly resilient, predictable line of revenue and you can see the revenue growing over time. This does overtime transfer in the cash flow and earnings. Now the cash flow is a little bit lumpy, which I don't prefer. I rather have more linear growth

in cash flow. But in this case, it all comes down to when they build their customers, that's it. They simply invoice customers all at the same time, they pay all at the same time. That way you have the lumpy cash flow. So it's not actually the fundamentals of their business that are lumpy. It's basically just accounting overall, the free cash flow on a per share basis is growing. They're doing buybacks, they're

growing earnings per share. I think it's going to grow a lot over the next couple of years, and this one's a bit more insulated from the cyclicality than most other companies in this industry. So this is one that I continue to believe is undervalued. It's not at an extreme low, but I believe the ASML could trade up to $1000.

I think that's relatively fair. The next one that we're looking at is Salesforce. While the stock price has gone down, the cash flow has gone up. I like looking at this on a trailing basis. I think it illustrates it best, but this is what the free cash flow looks like on a trailing basis. This doesn't strike me as a company having too much trouble. At least it's not showing up in

the numbers. But then if we look at the free cash flow per share, it's growing even faster because while they're growing their cash flows, they're doing share buybacks. Many people be quick to point out the enormous amount of stock based comp that this company does, but that's a bit of an old take. I used to have that take as well. When we were right here in 2023, over half of the free cash flow was diluted away by stock based comp. That's not the case anymore. Look at what's happened.

The stock based comp has been completely flat for the past three years. The free cash flow has doubled and then it's gone up tripled. So the free cash flow has gone up substantially. The stock based comp has stayed remarkably the same, making it so that the stock based comp impact is only 25%. That's less than a meta. So Salesforce is actually becoming a leaner, more capital efficient company, even in the way that they pay their

employees. They're also growing agent Force. You can see the total customer growth every single quarter. Again, this is on a quarterly basis, not annual. We look at the paid customers and this is growing. There we go. This is growing as well every single quarter. And they have a nice funnel there. It's kind of like Spotify where you have free members and then you have the paid. A lot of these customers are going to be funneling down to the paid membership over time.

So when we look at this, I like the fundamentals of the company. I like the earnings growth. I like the balance sheet, I like the valuation. Salesforce is again near an all time low valuation, even going back five years. the PE ratio is down to its all time low. The free cash flow yields at an all time high, making this company the cheapest it's ever been. Now I got a plug in Duolingo. This is the most volatile stock I own, meaning that the stock price trades around all the time.

It went down to $270 recently, and then it bounced right back up to 310. While there's literally no news going on. The only notable news about a couple days ago is that a lot of these companies like Apple, Meta, you name it, they're trying to make live language translation tools. Whether it's in your glasses or your Air Pods, they're trying to make these augmented language translation tools. Now, a lot of people argue that's a Big Bear case for Duolingo.

I don't believe it is. I think that the reason people are learning languages is not because of a lack of language translation tools. I think there's a lot of other motivating factors to learning a language. So personally, I don't buy into that bare thesis and I believe that Duolingo is a very good company. You can look at these charts. I I mean, just look at them. This doesn't take rocket science. Every single chart is going up. That's what's happening with the

company right now. So I'm going to take a look at the fundamentals. That's what I'm going to follow overtime. If I'm wrong on Duolingo, that's fine. I'm OK being wrong. Every investor is wrong on a couple holdings. It happens to everyone. Literally name your favorite best investor in the world. They've had their share of losses on different holdings. That's part of the game.

So if I'm wrong on Duolingo, that's fine, but I just want to give it a year or so. Right now, I believe the company's both undervalued based on its free cash yield of 2.2% and it's incredibly fast growth. Next up, we have Equifax. This is another company, I would say this one is a bit more conservative. If you're looking for a steady compound over time that has far less volatility but has a reason for upside, Equifax I think is 1 worth studying now.

I've looked into this company extensively. Equifax is incredibly wide mode. They have products that are deeply entrenched in the systems and processes of all different customer bases from the government, from real estate, real estate owners, landlords, businesses that hire people. They have, I mean, they're everywhere. They're the credit rating agency that has your credit report. They have the work number, workforce verification solutions. These products are actually

growing rapidly. Despite interest rates being high and mortgages being unaffordable, they're still growing their revenue Ave. steadily. If anything improves in these categories. If interest rates go down, if homes become more affordable, you better believe one of the companies that will benefit the most is Equifax. If we have the same mortgage volume that we did just a few years ago, Equifax would make a fortune. Most of that excess credit pulls

would drop to the bottom line. But even if that doesn't happen, even if we don't have that additional upside, this still should be a decent company that compounds at an attractive rate. Now next we move out of My Portfolio. We have a company that's caught my attention here, Adobe. Now Qualtrm has a new feature here. We've always had new snippets, but now we have much more in depth, real time news on every company.

And we have of Adobe reporting their fiscal Q3 results that beat estimates and raise their financial year 2025 revenue and earnings per share outlook, citing strong demand and accelerating monetization of AI features cross Creative Cloud and Acrobat. So even the Creative Cloud is doing well. That's what I thought was under threat by Canva and a lot of other companies. Doesn't seem like it is. They mentioned that the new AI features are monetizing well, They're accelerating

monetization. Management also noted that artificial intelligence infused annual reoccurring revenue has surpassed 5 billion. The guidance Lyft helped the stock trade higher after hours. This may ease some of the concerns about the pace of AI monetization versus rising competition. Adobe's facing new competitive threats. You have challenges to the Moat

of the company. Primarily you have smaller players like Canva. You have companies that have kind of circumvented them in design, like Figma, which they weren't able to buy. And you also have Gemini, Google's AI image editing feature, doing a lot of the same things that Photoshop used to be able to do. So now we have a situation where Adobe seems like it's just surrounded by new technologies, new competitive threats. Investors are very concerned about this long term, and I am

as well. It's caused me to to look away from the stock for a bit. But the numbers don't lie. They don't lie historically. They don't paint a perfect picture of the future, but they don't lie. When we look at the numbers here, the digital media is growing 11.6%. This includes Creative Cloud. So Creative Cloud is growing, not shrinking.

This is a very similar feeling to what we just had with Google where Chachi BT this new dynamic crazy competitive threat was going to kill Google, but Google just kept growing and the numbers quarter after quarter finally beat down investors bear thesis. And I believe we could see a similar situation where quarter after quarter Adobe just continues to grow despite whatever bad narrative you throw at it. The next thing that we can look at here is the total performance obligations.

Adobe has grown its performance obligations, which are contracts over time by 13%. So again, this is growth right on pace. As usual, nothing concerning. In this report we look at Adobe's PE ratio. We'll zoom into it here. the PE ratio is 15. Then we have the free cash flow yield, 6.3%. Now a 6.3% free cash flow yield. You factor in stock based comp. Even if you factor that in, it's around a 20% hit, which means after stock based comp, it's a 5% yield.

Now we can see what that yield looks like historically over time. We'll zoom out to the past five years. We'll look at the free cash flow yield. It's the highest yield the company has been at over the past half a decade. If we look at it on APE ratio. So no longer cash flows, but we're looking at it on earnings. Remember, the lower this goes, the cheaper it is. In this case, it's again the cheapest the company has ever been throughout it's history.

This is the maximum bearishness investors have been. Every single metric you can look at from Adobe is super cheap. And at some point, at some point, it's going to price in the fears around it. At some point, investors are going to say this is enough. This company's already priced in the potential of disruption. In fact, they priced it in too much. And if that disruption doesn't come, if it never happens, imagine if this company gets rerated back to a 20 multiple or a 25.

This stock price could quite literally double from here from 3:50 to 700. This is another very interesting case of the valuation of another high quality company that's gone down because of a very bad narrative. And what is management doing during this time period? Well, what they're doing is they're deploying their capital and doing what every investor says management should do. They're buying back shares aggressively. They've effectively reduced the share count by 4% year over year

from the last quarter. So this speeds up their earnings per share growth. It speeds up their free cash flow per share growth. This is exactly what investors want management to do. Now finally, we get to United Health Group. This is another one that I believe was formerly considered a very high quality company, but then it went through a rough patch. Narrative went down, and part of the problem here was a deliberate decision from United Health Group.

They frankly just wrote bad policies on their behalf. They over insured people. They didn't realize how much people would actually use health insurance. Everybody used it like crazy. It cost United Health Group A lot of money and that takes time to work its way through. So you're going to have a couple years of the financials looking bad, but they'll eventually roll over.

It's just something that's going to have to work its way through the United Health Group financial system, but they'll eventually get the the policies back on track to where they should be. It's going to take a hit for the company, but it should recover. At the same time, this company trades at cheap valuations, 22 PE ratio, a 7.8 free cash flow yield, so super low free cash flow yield. The stock price is down 28% even after a recovery of being up in

the past month, 32%. Now, like any company, it's nearly impossible possible to buy the entire bottom. Even Buffett's team didn't do it. So you can't time the bottom perfectly. But I think looking forward over the next couple of years that buying now is likely still a good time to buy. I think this company is too big to fail, too big to go away. It'll be around forever and it's one to still consider if you're looking for a group of undervalued, high quality

companies. Now, the next two to round out the list are two companies that I'm not going to go into in any level of depth. I'm just going to mention them. Google's one of them. I think it's going to go to $300 per share in this case. Again, I think that Google has been proving people wrong for a long period of time, and it's easy to want to take off the gas pedal. I don't think investors should. I think looking back five years, investors will wish they bought Google for $240 per share.

Another one that I think investors will regret not taking advantage of over the next five years is Amazon. Just in the past day, Morgan Stanley reiterated Amazon as a top pick at $300 price, including the company's same day fresh grocery delivery to 1000 new cities. Amazon was facing one basic competitive threat, which was Walmart's grocery delivery. And now they're addressing that problem. They're creating their own delivery network for groceries that is growing rapidly.

So I see that as another risk being reduced for Amazon. They're building massive clusters for GPU processing with AWS to increase their fulfillment capacity. We had that semi analysis report saying that they're going to have an uptick in growth in AWS, far surpassing what investors expect. So I think there's a lot of bullish catalysts over this one over the next five years.

Right now is a time to consider for Amazon, and that rounds out the companies that I'm looking at. Now. Let's go ahead and get to some news. Now moving on, we get to the new competitor for Netflix. This is news that's happening in the media world and it comes down to Larry Ellison, that guy that's worth over $400 billion. He's one of, if not the richest person in the world. He's right there next to Elon Musk. So it's a bit debatable.

It might change day-to-day, but he's about the richest person in the world. And Larry has a son. The son is named David Ellison. He's around 41 years old, I believe. And David has a interest. His interest is buying media companies, changing the media landscape. He's very interested in this category and he's moving rapidly. He's already bought Paramount. He did it with his company called Skydance. So Skydance came in, they took over Paramount. Then on Paramount, they

immediately made changes. They got South Park on it and they made a deal with the UFC in like a week. They were doing these type of multibillion dollar deals. David's moving fast. He has a lot of money to work

with and he has ambitious plans. And now reportedly the next ambition he has is for Skydance and Paramount, these two companies that he just recently combined together to take over Warner Brothers Discovery. Remember that Warner Brothers and Discovery merge together, now Skydance and Paramount merge together and now they want to merge these previously 4 companies combined into a massive media empire, one of which that would match the likes of Netflix or the likes of

Disney. The bid will be for the entire company, including its cable network movie studios, the people said. Warner said late last year that it planned to restructure into two operating divisions, 1 focused on the legacy cable television business and the

other on streaming in studios. By preparing a play for the company before Warner's plan split, Paramount, Skydance is attempting to pre empt a potential bidding war for the studio and streaming unit and could include that could include deep pocketed technology companies such as Amazon and Apple. If successful, such a deal would bring together 2 of Hollywood's most storied studios and the parent companies of streaming services HBO Max and Paramount Plus. Warner is the home to Barbie, BC

comics, Harry Potter and TV shows such as The White Lotus, as well as cable news network CNN, TBS and TNT. The scale of the potential combination could bring antitrust and regulatory scrutiny. Now Netflix investors are looking at this like I am. This is one of my largest positions. So I look at any competitive dynamic change and this is a negative for Netflix. It would not be good for Netflix

if these two companies combined. First of all, Netflix makes money by licensing both of their content. So they license content from Paramount, they license it from Warner Brothers Discovery. That's why you get movies like Dune on Netflix. Those aren't Netflix's property, they're just licensing them. When the companies combine together, it makes it much more difficult to license and barter with them. They basically have more chips on the table. They can barter better.

So Netflix will be closed off from a lot of content that they probably have access to today. Now, Netflix is really well prepared for this. They can produce their own content. They have enormous budgets. In fact, even after combining both Warner Brothers Discovery and Paramount, Netflix still has around double the money to invest in content. So they have an enormous cash

flow pile every year to invest. So this does change the landscape slightly for Netflix, but no matter how much you slice and dice or combine companies together, it really hasn't affected Netflix in the long run. So far, this company has withstood all of these type of changes that these other companies make. Now finally, we take a look at financial TikTok, where we get

advice and insight that you just can't find anywhere else. TikTok is the home of, of course, the best financial advice. Today we're looking at someone that's interviewing for a customer service job and he shows how it's done. He's recording his interview for this customer service job. Tell me a little bit about yourself and why you're the right person for this role. Yeah, absolutely. I really think I'm going to be the perfect candidate for this. I have eight years experience in

marketing. I've grown businesses by millions of dollars. I have a full year's experience in customer support where I handle thousands of tickets each month. And on top of that, I like you said, I do come highly recommended because I know how to get results. OK, I couldn't even hear what you were saying. You need to turn off the TV or whatever you're. Doing how is she not smiling? Come on, people like this. I know it's an interview.

She's probably, you know, she feels like she has to take it seriously. If someone I've interviewed a lot of people in the jobs that I had prior to YouTube and even in with YouTube, but the interviews I've had, if someone did this, I could not I, I, I would die laughing if someone called in and had music playing in the background while they gave a speech. How can you be that serious? Relax a little bit. It's OK. The the kids obviously having fun.

And that was actually a very articulate, well timed little monologue. He did that. That was actually impressive. That's harder. You try doing a monologue for 45 seconds or whatever it was, you know, 35 seconds and timing it perfectly with music, it's easier said than done. So that's actually a little bit impressive. You know, if I, if I saw someone doing this again, I, I would just laugh. This is this is hilarious. It continues on. I really need this. Please, I'm very desperate.

I am begging you. I do have some disabilities and with that comes some tools that I like to use to make my life a little easier, OK? The problem is this is a client facing role. OK, so she's taking it super serious. She's doing her job. I, I don't blame her. No problem with this lady. But she's she's doing her job, taking it serious, explaining that this doesn't work and it it just goes on here. There you go. You have the best of TikTok there. That is how you do an interview.

Just time it to some theme music, put some heroic music as you're talking about your strengths. And then if they decline to give you the job, just play some sad music in the background. That'll be it for this episode. See you next time.